Thursday, August 21, 2014

Although not a new concept, I like to think of my dividend growth stock portfolio as a snowball.

If you can imagine standing at the top of a really steep hill, building your snowball from scratch starts with getting your hands on some snow. And the snow, in the case of a dividend growth investor, is capital.

The Snowball Analogy

The snowball analogy is pretty apt, because the power of compounding eventually takes hold. You take a handful of snow, roll it into a ball, and then start to roll that ball downhill. Over time, it eventually becomes bigger and bigger as it accumulates more and more snow. The hope is to eventually turn that once-small snowball into a self-propelling machine. You’ll push that snowball along for many years yourself, adding fresh snow as you go. But eventually the snowball rolls all by itself.

Once that thing is rolling downhill all by itself, you’ll be alleviated of a lot of work. And that’s where you want to eventually be!

The Power Of Compounding

You can see this work with real numbers.

Investing just $1,000 at an 8% return, compounded monthly, turns into $24,273.39 after 40 years. So you take an initial $1,000, which doesn’t seem like much snow. But roll it down a hill steep and long enough, and you end up with something sizable. $1,000 won’t deliver much dividend income all by itself, but almost $25,000 will produce ~1,000 per year in dividend income, assuming a 4% yield.

That’s your initial investment returned to you every single year.

Not bad! I’m ignoring taxes and inflation here for the sake of illustration, but you can see what happens when you add even relatively small amounts of snow and give that snowball a long enough ramp to roll.

The power of compounding is real.

My Snowball

I started my snowball with $5,000 back in early 2010. Not a particularly big snowball at the start, as I was only able to produce $269.33 in dividend income that year. But I’ve continued to add snow and roll that thing downhill, and I’m going to earn more than $5,500 in dividend income this year. That’s after four years.

I realized at 27 years old I was standing at the top of a really long hill – if I could continue living for quite a while – so there was this incredible opportunity ahead of me. Now after a little more than four years my snowball is almost $170,000. It’s not self-propelling quite yet, but it’s getting there!

Now, I’ve been aggressively saving and regularly investing that excess capital all along the way. So I’m still putting in a lot of the legwork. But, eventually, compounding will do more legwork than I will. And eventually I’ll stop pushing once that thing is rolling faster than I can run. Look out below!

Build A Giant Snowball Reasonably

The goal is to build the snowball as big as reasonably possible, while still enjoying yourself along the way. Dedicating your life to only building the biggest snowball you can will likely not lead to the most vibrant life possible, but at the same time the snowball itself will provide a lot of benefits unto itself, as the larger the snowball, the more passive dividend income you’ll likely generate. And the more passive income you can generate, the more time you have to spend time on things that matter to you. A delicate balance, but a lot of legwork early goes a long way.

But one fantastic aspect of all this snowball building is the fact that, one large enough, it obviously starts to pick up snow all by itself. Building a snowball from scratch involves a lot of work on your part from the get go. You rummage around and scrape up as much white stuff as you possibly can. You pack this snow into a wonderful circle and you plop it onto the ground. You start to roll it down the hill, and pick up more snow as you go. Doesn’t seem like a lot of fun at first.

But over time, it becomes a lot more fun!

Dividend Growth Is The Secret Sauce – Real-Life Examples

See, just like a real snowball, over time your portfolio will start to build all by itself. And dividend growth is the secret behind the magic.

I’ll show you how that works.

I currently have investments with 49 high-quality companies spread across many different industries. And all of these investments are with companies that pay dividends. But even better, they regularly increase those dividend payouts.

I’ll give you some real-life examples from my portfolio and how dividend raises impacted my snowball just this past year.

Earlier this year, PepsiCo, Inc. (PEP) raised its quarterly per share dividend from $0.5675 to $0.6550 per share. That amounts to an increase of 15.4%.

I own 77 shares of this wonderful beverage and snack company. That means my annual dividend income went up by $26.95 per year. That’s like investing $898.33 of my own money, assuming a 3% yield (the approximate yield of PEP at the time of this raise).

That’s $898.33 less fresh capital I had to scrounge up and add to the snowball. It’s picking up snow all by itself as it builds momentum.

Just last month, Target Corporation (TGT) increased its quarterly per share dividend from $0.43 per share to $0.52. That’s a 21% raise for shareholders. Awesome!

Since I own 70 shares of this great retailer, my passive dividend income increased by $25.20 per year. That’s like investing $840.00 of my own fresh capital at a 3% yield, but I didn’t have to. That’s because my snowball is rolling along now, building into a monster all by itself.

The Snowball Eventually Rolls Itself Downhill Via Dividend Growth

These examples are powerful. They prove that over time your snowball will eventually gain momentum, rolling itself down the hill with more force than you could provide. That’s really the power of dividend growth. It’s amazing how much a snowball can grow even without someone pushing.

My portfolio is on pace to spit out more than $5,500 in dividend income this year. Average in just 7% dividend growth in aggregate over the next 12 months and I’m looking at an additional $385.00 in dividend income before I even add any fresh capital myself. That’s like investing $12,833 of my own hard-earned money (assuming a 3% yield), except I didn’t. The wonderful businesses I’m invested in basically did that for me by raising their dividend payouts, in this example.

Looking into the future, the power of dividend growth is amplified. I anticipate to earn $15,000 per year in dividend income in less than a decade, essentially rendering me financially independent. Add in that same 7% growth across the portfolio, and after the first year I will have increased my income by $1,050. That’s like investing $35,000 of my own capital! And you can see how this builds on itself year after year, increasing the spread between income and expenses and thereby the margin of safety in early retirement.

This is really why dividend growth investing can be so wonderful, and how a snowball can start to roll downhill all by itself. The key is to get a really long ramp, start early, and regularly add snow for a while. It’s hard at first to add snow month after month, pushing it along. It’s cold outside and pushing doesn’t sound like very much fun. Maybe you’d rather be inside drinking some hot cocoa. And I can’t blame you.

But if you take the time to put a solid portfolio together with equity in wonderful businesses that regularly and reliably pay and raise dividends, eventually you’ll be sipping hot cocoa under a warm blanket while that thing rolls downhill all by itself. You’ll likely be financially independent at this point, and you’ll be able to do whatever you want in life. You’ll be able to spend more time with loved ones, travel abroad, golf, read, or go on a long road trip. Whatever. But you won’t have to push anymore.

Full Disclosure: Long PEP and TGT.

How about you? Have you witnessed your snowball start to roll downhill all by itself? This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

1 comment:

I learned early not to spend too much and let my money work for me instead.Money spending sacrifices at any age will benefit your money situation later. Protect your snowball at all costs and keep rolling forward. Even with life setbacks just reset and keep building forward.